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In Search of Stocks, Will Travel

Michael Cook, co-manager of New River Small Cap, does his homework by scoping out companies in person.

By Thomas M. Anderson, Contributing Editor
November 6, 2006

Michael Cook is no pasty-face office dweller. Cook, co-manager of the New River Small Cap fund, loves to take field trips to visit companies. He spends half his time on the job meeting with executives and touring factories and offices. And he's not just visiting companies whose shares his fund owns. He's also visiting key competitors. "I believe you learn more from the bulletin board in a break room than you do in the board room," Cook says.

Sure, other managers make company visits, but Cook takes the vetting process further than most. Consider his evaluation of Cascade Corp. Cook started examining the hydraulic-equipment maker in the late 1990s after reading an article in an obscure trade journal about Cascade's new fork-lift technology. He toured the company's main plant in Fairview, Ore., then went in China to see a Cascade factory and those of its chief rivals.

After site visits and meetings with mid-level executives, Cook determined that Cascade's stock was undervalued. He based his judgments partly on the long-term growth prospects for the company's new technology. New River has held Cascade stock since the fund's October 2003 start. In that time, Cascade shares (symbol CAE) have about gained 135%.

On his excursions, Cook looks for stocks of companies that excel in a niche. Outdoors outfitter Columbia Sportswear (COLM) and agricultural equipment maker AGCO (AGCO), which dominates markets in Europe and South America, are among the fund's top holdings. Cook also prefers companies that generate enough cash from operations to finance expansion without having to borrow money.

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But having great executives and lots of cash is not enough to make the cut. Cook aims to buy stocks at bargain prices. To do this, he estimates the value a private buyer would pay for the company and seeks to buy shares at a 50% discount to that estimate.

Cook and his co-manager, Andrew Taylor, do extensive homework on each stock they pick because the fund holds only 20 to 30 stocks. The pair try to temper risk by refusing to allow any stock to constitute more than 10% of assets and no sector to represent more than 25% of the portfolio. Cook and Taylor trade infrequently. The $37 million fund's annual turnover rate is just 6%.

Although their fund is little more than three years old, Cook and Taylor are hardly novice investors. Their Memphis-based firm, Cook Mayer Taylor, has run money since 1990 and has about $1 billion under management in separate accounts. Cook and Taylor have taken a similar approach with private accounts and performed well. From 1990 to 2002, accounts gained an annualized 14% after fees, beating the small-company Russell 2000 index by an average of six percentage points per year.

The duo have yet to distinguish themselves with New River Small Cap (NRVSX, 866-672-3863). It returned an annualized 13% for the past three years through October 31, while the average small-company value fund returned an annualized 17%, according to Morningstar. The no-load fund levies annual fees of 1.5%, which is about average, and it requires a $1,000 investment minimum.

New River employs a consistent strategy that has worked well in the past. Given the shortage of solid small-company funds that are open to new customers, investors might want to consider this fund for the part of a portfolio reserved for small, undervalued companies.